My 3-minute video response: What you can do about today’s economy

September 18 77 Comments latest by Worried About Your Money? « 4 Guys Who Know Nothing

Yesterday a bunch of you left comments and sent me emails about what’s going on in the economy. Here’s a quick video I did to answer some of them. Check it out and see my notes below.

0:01 — Intro: We’re going to talk about what’s happening with the economy, asking the right questions, what you can do with your money. PS–It’s my first time doing video for this site, so please cut me some slack!

0:12 — Lots of questions: “What’s happening?” “Who can I blame?” “Why is the government bailing companies out?”

0:45 — Most of the questions are totally irrelevant!.

What do we know?
1:11 — Your money is generally safe: Money in savings accounts is insured up to $100,000 per account, and money in brokerage accounts is insured up to $500,000 (with some nuances). However, this doesn’t mean money in your portfolio is insured against losses in the stock market — if your portfolio is down 20%, it’s really down 20%. That’s why investing is “investing,” not “picking a sure thing and profiting a lot.” SIPC insurance means it’s insured against the brokerage firm going belly-up. Learn more by reading this article.

If you’re looking for a broad-based understanding of what’s going on, The New York Times has been providing excellent coverage, especially this page.

Worry about the things you can control
1:47 — We misjudge risk and worry about stuff in the news — as opposed to the real risk. Let’s say you’re worried about not having enough money. Which is more likely?

1. You’ll run out of money because you lost it all in a tumultuous stock market
2. You’ll run out of money because you didn’t save enough, spent money on stupid stuff (vs. spending consciously), and didn’t properly diversify your assets

OF COURSE it’s the second, but because of the availability heuristic, we tend to overweight what’s easily accessible in our brains (i.e., we’re all worried about what we read in the papers right now).

Remember, we are cognitive misers and can only pay attention to a few things, so take advantage of that. I’d rather focus on the very real risks that have caused millions of people before me to not have enough money to sustain their lifestyle — that is, not saving enough — rather than worry about a macro-economic topic that’s in newspapers. Sure, it’s important, but I can’t control anything at the macro level. At the micro level, I can control everything. (Note: Here’s a good book on judging risk.)

What you should focus on
2:12 — Save more — single-best thing you can do to mitigate risk

(No time stamp.) I forgot to mention this in the video, but please don’t fall prey to the myth of financial expertise: Nobody has The Answer about how bad this will get and how long it will go. Experts have been trying to predict this for years — remember in 2007 when they said it would “probably be fine by the end of the year?” — and they’re still trying. And failingDon’t try to time the market. You’ll fail too. Just pick a regular, consistent investing strategy and optimize for the long term.

2:23 — Tweak your asset allocation

2:42 — Stop asking stupid questions!

2:52 — Best things you can do: Forget about macro-stuff and focus on your own finances. Save more, do a kick-ass job at work and get a raise, or even start a side business.

Hey, what did you guys think of the video? Should I do more? Let me know if you have any suggestions or questions for other stuff you want me to talk about.

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The $28,000 question: Why are we all hypocrites about weddings?

August 14 184 Comments latest by Elizabeth

On Saturday night, I was out with some friends, including one who’s planning her wedding for next August. I’ve had a bunch of family weddings in the last few months, so I suggested she check out a nearby stationery store for her invitations. “It’s really expensive, like $14 per invitation. But at least you can get some ideas for design.”

She looked at me and, without a hint of arrogance, said, “Oh, I’ll check it out. I actually talked to my family and we have an unlimited budget for the wedding.” With one sentence, I was rendered speechless. She didn’t brag. She just said it matter-of-factly: Her wedding could cost anything and it was ok.

She comes from a very wealthy family, so this isn’t such an unusual thing. What is unusual, however, is that so many people will scoff at the above story — and then proceed to spend ungodly amounts on large purchases like a new home or a wedding while steadfastly insisting how absurd “most” people are. Today, I want to write about how to plan for these large life events. But be prepared — you’re going to have to confront the hypocrisy that we all have when it comes to these purchases.

Of course your wedding will be simple
When my first sister called me to tell me that she’d gotten engaged earlier this year, I was out with my friends. I ordered champagne for everyone. When my other sister told me she was getting married a few months later, I told all my friends again. Then I found out they were having an East coast wedding and a West coast wedding — each — for a total of four weddings in a few months. I ordered a round of cyanide and made mine a double.

That’s what got me started thinking about weddings recently. The average American wedding costs almost $28,000, which, the Wall Street Journal notes, is “well over half the median annual income in U.S. households.” Hold on: just wait a second before you start rolling your eyes. It’s easy to say, “These people should just realize a wedding is about having a special day, not about putting yourselves in crippling debt.”

But guess what? When it’s your wedding, you’re going to want everything to be perfect. Yes, you. So will I. It’ll be your special day, so why not spend some extra money to get the extra-long roses or the filet mignon?

My point isn’t to judge people for having expensive weddings. Quite the opposite: The very same people who spend $28,000 on their weddings are the ones who, a few years earlier, said the same thing you’re saying right now: “I just want a simple wedding. It’s ridiculous to go into debt for just one day.” And yet, little by little, they spend more than they had planned — more than they can afford — on their special day. Why is that?

The spending for weddings increases year after year. Yet we insist that we will be different: Of course we won’t spend that much. Of course we’ll have a budget. Of course we’ll have a small simple wedding. Sure we will.

So what should we do?
So knowing the astonishingly high costs of weddings, what can we do?

I see three choices:

Cut costs and have a simpler wedding. Most people, frankly, are not discplined enough to do this. I don’t say this pejoratively, but statistically: Most people will have a wedding that costs tens of thousands of dollars. (If you want to debate the difference between the average or median amount, see here or below for a simulated wedding budget.)

Do nothing and figure it out later. Most people do this. I spoke to a recently married person I know who spent the last 8 months planning her wedding, which became a very expensive day. Now, months later, he and his wife don’t know how to deal with the debt resulting from the wedding. If you do this, you are a moron. But you are in good company since almost everybody else does it, too.

Budget and plan for the wedding. Ask 10 people which of these choices they’ll do, and every single one of them will pick this one. Then ask them how much money they’re saving every month for their wedding (whether they’re engaged or not). I guarantee the sputtering and silence will be worth it. (Leave a comment describing what happens!) This is a great idea in theory, but is almost never followed in practice.

We actually have all the information we need: The average age at marriage is about 27 for men and 26 for women. We know that the average amount of a wedding is about $28,000. So, if you agree with this choice — and you don’t want to go into debt for your wedding — here’s how much you should be saving (RSS readers, click here):

Most of us haven’t even thought about saving this amount for our weddings. Why not? What do we do instead?

We say things like,

• “Wow, that’s a lot. There’s no way I can save that. Maybe my parents will help…”
• “My wedding won’t be like that. It’ll be simple and elegant”
• “I’ll think about it when I get engaged”
• “Luckily, I won’t have to pay for it.” (Who will? Is your future spouse thinking like this?)
• “I have to marry a rich guy” (I’ve heard people say this and and they were only half-joking)

More commonly, though, we don’t think about this at all: one of the most major expenditures of our lifetimes, which will almost certainly arrive in the next few years, and we don’t even sit down for 10 minutes to think about it. Something’s broken here.

Here’s a sample expense sheet of a wedding. Try playing around with it (RSS readers, click here):

(Figures taken from my dad, recent wedding-planning expert, and partially combined with these figures and these figures.)

Note how changing the amount of guests doesn’t really change the cost very much: Reducing the headcount 50% only reduces the cost 15%. Creating a simple, affordable wedding, it turns out, is surprisingly hard.

It’s not just weddings
Weddings are just one example. We don’t plan out our largest expenses, like houses, cars, and even kids. This is what I call conscious spending but, honestly, it’s much easier to simply ignore these looming purchases and think about them later.

The problem is, if you don’t plan ahead, it becomes much, much more expensive. From the example above, a 25-year old who starts saving for his wedding will have to save 3.5 times the monthly amount a 20-year old will. The alternative is to simply finance it, which makes it even more expensive because of interest. This is especially true of long-term loans for houses.

Some recommendations
1. Be realistic. Even though you’re reading personal-finance blogs like iwillteachyoutoberich and are probably better at your finances than 99% of other people, you’re still human. Your wedding (and mine) will be more expensive than we plan. The head-in-the-sand approach, however, is the worst thing we can do. Sit down and make a realistic budget of how much your big purchases will cost you in the next ten years. Do it on a napkin — it doesn’t have to be perfect! Just spend 20 minutes and see what you come up with.

2. Set up an automatic savings plan. Since the last recommendation to make a budget was completely unrealistic and almost nobody will do it, I suggest just taking a shortcut and setting up an automatic savings plan. Assume you’ll spend $25,000 on your wedding, $20,000 on a car, and (however much) on a down payment for a house. “But Ramit,” you might say in an annoying perfectionist voice, “that’s almost $3,000 per month. I can’t afford that!” Can you afford $300? If so, that’s $300 better than you were doing yesterday. Now that you’ve read this, your preparation — or debt — is a choice.

3. You can’t have the best of everything, so use the P word. Prioritization is such an important concept. Like I said, it’s human nature to want the best for our wedding day or first house, and we need to be realistic about acknowledging that. With that said, we simply can’t have the best of everything. Do you want the better food or an open bar at your wedding? If you have the costs on paper, you’ll know exactly which tradeoffs you can make to keep within your budget. If you haven’t written anything down, there will appear to be no tradeoffs necessary. And that’s how people get into staggering amounts of debt. For the things you de-prioritize, beg, borrow, and steal to save money: Use a public park instead of a ballroom, ask your baker friend to make the cake, and ask relatives to help with cleanup. This is where, if you plan ahead, time can take the place of money.

Ideally, you do #1 (simplify) and #3 (plan). But even if you can’t simplify, at least you can plan.

The result — and what to do today
Today, sit down and plan out the major purchases you’ll have in the next ten years — whether or not you’re engaged or have any plans to buy a house soon. This is really important: Planning before you need to separates rich people from everyone else. Plan out how much you’ll reasonably need. Plan out how much you can save. Then go into your savings account and set up an automatic deposit plan. (I use ING bank — set up an ING account in about 15 minutes.) Starting tomorrow, your savings account should have virtual buckets of money for upcoming items (e.g., 30% for your down payment, 25% for your wedding…).

The result: A wedding where you know all the costs and prioritize for what’s important for you. A wedding where, the day after, you’re debt-free and can start your lives together. And the ability to control your spending, instead of having it control you. Sort of like the point of this entire site.

I’ll write more about the logistics setting up automatic savings plan in my upcoming book, I Will Teach You To Be Rich. To get early excerpts and the chance to be featured in the book, sign up for my free newsletter (sample newsletter here):

If this is your first time to iwillteachyoutoberich.com, the blog on personal finance and entrepreneurship, here’s a quick guide to get started.

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Chicken Little and Kooks Who Don’t Know What They’re Talking About

February 28 52 Comments latest by Jim Starzyk

This post is long, but there are emails and comments from a bunch of nuts that I pasted, so don’t be intimidated. Today I threw all pedagogical goals out the window. My goal is instead to have you shaking your head saying “what the hell?” by the end of this.

See, every single day I write on here, I try my hardest to communicate the idea that personal finance is not very hard to get started with. There are a few strategies that time and research have proven work for making money. Yes, there are endless strategies to optimize, but for most of us, they’re irrelevant: The largest, most important problems are that we don’t get started early enough and we’re not disciplined enough. Unfortunately, that message isn’t sexy enough to sell magazines or satisfy kooks who want to wring their hands about the current state of affairs. As a result, we see people confusing global geopolitics with personal finance. They worry about how the oil shortage in Chechnya (or whatever) will affect the currency crisis that will affect their country’s immigration policy that will affect the unemployment numbers that, somehow, will affect the amount of money they’re able to save.

I hear these kooky tales and they infuriate me. Today made me rise out of my PBwiki cave and write this because we have half the financial pundits on TV freaking out about yesterday’s drop in the stock market.

Minor stock-market drops like this amuse me because we see these crazies come out in full force. On the Reddit page describing yesterday’s stock-market decline, for example, we see some very good comments (towards the top) and then many idiotic ones like these:

• “The 10% return myth is nothing but Wall Street propaganda”
• “500 points on teh dow in one day is a big deal. If that continutes for 1-3 more days it will melt down”
• “Equities only got really good returns when most people were scared of them”
• “The real history of US equities is just that there were three really big bull markets: in the 20s, in the 60s, and in the 80s/90s. Outside of those periods broadly investing in stocks has been a lousy plan, and for most of the 19th century it got you soaked.”

Here’s a tip: If someone starts using words that sound really big combined with accusing somebody of a Very Large Conspiracy, chances are they don’t know what they’re talking about. Also, you’ll notice that kooks use qualifying words like “broadly” and “in general” and “melt down” (what does that mean, exactly?). It’s hard to be wrong when you can’t be pinned down.

I have a serious problem with people using wide-eyed, handwavy geopolitical logic to explain what’s going to happen with their money. But one thing these short-sighted pundits forget to remember is that a market goes up and it goes down. YESTERDAY IT WENT DOWN. ALL DATA WE HAVE INDICATES IT WILL GO UP SOMETIME SOON.

A couple months ago, a friend of mine called me and started telling me about her personal finances. This girl goes to a Very Good Law School, so don’t dismiss her for being unintelligent. But I couldn’t help but feel rage as she started telling me the following things:

• ”I’m not going to invest in the stock market because it’s not safe. The current crisis means our money will be worth less and less every day. When you factor in the immigration crisis, it’s virtually untenable.” I have to give her credit, though: It was a good use of the word “untenable.”
• ”I really want to start my own company doing something I love. I think entrepreneurship is safer than investing.”
• ”I want to stop working in 5 years and support my family financially (even though I’ll stay at home to raise the kids). So I have to start something successful.”
• ”I don’t think 401(k)s are the way to go because there is a lot of risk and you can’t control your choices.”

We see someone here who doesn’t really know what she’s talking about. She’s not stupid, just misinformed. I told her that, too. These are not the reasonable conclusions of someone who’s informed about personal finance, but someone who’s cobbled together a shaky theoretical framework that ties personal finance, global politics, and entrepreneurship together. I wanted to die.

I probed a little bit. “Where did you learn this stuff?” I asked. She hemmed and hawed and finally said that she’d read “part of” Donald Trump and Robert Kiyosaki’s book (read some thoughts on the book here).

This made me so mad. Here we have someone who’s getting bad information—and then, only reading part of the book—and not comparing it to any information. While she was misinformed, she needs to take some responsibility for actually learning this stuff. Think how much time we spend on things like our email, our problem sets, or even reading US Weekly. Then think how much time we spend seriously learning about personal finances. Which affects us more? Which one will you complain about more for the rest of your life?

I was doubly frustrated that she was using one book as her gospel. Listen, if you use one place as your only source of information, you are a moron. I don’t care if it’s iwillteachyoutoberich or the Wall Street Journal. One source is not enough. You need to be reading multiple, research-based sources so you can compare what is actually happening, not just discussion groups on the Internet where people share their opinions about what’s going on.

If you do read sources that only confirm each other, you get something like this. Here’s an email I got recently that just blew my mind. This iwillteachyoutoberich reader uses the shakiest logic I have ever seen to paint the most dire picture of personal finances in America. Take a look:

“The blogs on personal finance have exploded since then. Good way to tell we’re at the cusp of a serious recession now, not that half-asssed one when the stock market dot-bombed.

Of course, that mini-recession hurt me badly, because there was a state budget crisis nationwide and I work in government. I couldn’t find a job. I’m working now so I guess I’m better off now than I was then. So, we’ll see.”

This is all I asked:

“Why do you think we’re coming up on a recession?”

And the handwaviness began:

“The housing bubble peaked in mid-2005, and construction jobs are dropping. The government picked up some of the slack in the 2000-2005 period by hiring people in defense, and of course many of the construction workers were illegals who are now leaving in droves. So unemployment isn’t bad right now. What’s on the horizon now is weaker consumer spending because the HELOC ATM is closed for business. Also, as the subprime lenders fail, a lot of money in the system is starting to vanish.

Loans are on the books for much more than the house (asset) is worth, especially in today’s dead housing market (huge inventories from overbuilding, houses spend months on the market). Debt was sold and resold, leading to a chain of insolvency that could bring us back to an S&L crisis type disaster. Check out the Mortgage Lender
Implode-o-Meter:

http://ml-implode.com/

Also, we have an inverted yield curve and the dollar has lost a lot of value in the last two years. This by itself doesn’t mean much but it could lead to government actions with a recessionary outcome–or (as many fear) stagflation.

With any recession, not all sectors are affected, and, from my reading about the Great Depression, even in a deflationary era those who were accustomed to hustling for their living–artists, musicians, insurance salesmen–continued to make a living, while those who expected a job to just be there for them ended up destitute.

Right now the warning signs are all in place, and the housing bust is beginning its drunken walk to the bottom. Vast amounts of wealth, as held in RE, are vanishing. Prices of certain commodities are dropping (=weak building/production/jobs outlook), while the price of food, which everyone needs to buy, is looking to go up, which will squeeze out the market for everything else.

Look at Ford. Look at SoCal real estate. Interesting times are ahead…”

I asked this:

“Out of curiosity, do you have any specific, measurable factors that you predict? Something you could be held to in 3 months, 6 months, etc?”

The response:

“Wow, put my money where my mouth is? Well, I’m not an economist, and I’m relying on other people’s analysis. I expect that this coming spring real estate season is going to be very painful for a lot of people, with the median sale price finally dropping as the cash-back lending scam is exposed to the light of day. (It’s already being exposed in AZ, which had one of the worst bubbles in the country in Phoenix.) But this is all old news–my mother tells me that home valuations in Massachusetts are already at 1997 levels.

In six months? Seriously, that is so short term. A lot could happen depending on whether Bernanke raises or lowers the Fed rate in the short term. Also, many major players are continuing to prop up the dollar. Japan wants a strong dollar so they can sell Sony and Toyota products, China wants a pegged dollars so they can sell cheap crap, and even Germany has a vested interest in a strongish dollar (look at where their trade surplus is coming from). Central banks won’t be able to keep this house of cards up forever, but they should be able to manage the next 6 months. So far (last year), there were some times went the dollar softened a lot, and certain central banks rushed in to prop it up. Hence the dollar see-saw.

Here is a pretty hard-and-fast prediction: food prices are going up. Wheat production has dropped in favor of corn for ethanol, there was a freeze in California and a freeze is coming Florida, ravaging vegetable crops. In the mean time, with the savings rate flat instead of negative, as HELOCs go away, there are going to be a lot of Americans who look at the high price of eating out and just say no (or seek bargains). Some restaurant chains (eg Don Pablo’s) are already in trouble; I expect more to be in trouble in 6 months as higher food costs (traditionally the cheapest part of the equation), and increasing wage demands run smack into lighter wallets. Middle class, keep-up-with-the-Joneses America is being squeezed here. Just look at the woes of Target last year. Look at 2006 holiday shopping (flat, YOY). Multiple middle/upper middle chains are in trouble; discount chains are also in trouble. High end had a great year, with all the huge profits from hedge funds and private capital lbo’s (legal thievery) and huge bonuses on Wall Street.

Some expect Toyota, Honda and other Japanese car makers to do well this year because foreigners do not like the new Japanese gov’t and are discounting the yen as a result. I don’t really know much about this, though.

Wall street: insiders say that everyone is in lalala denial mode, trying to get another quarter or year of profit before the shit hits the fan. For example, Bernanke right now has the power to unleash a bloodbath in the bond market (which is in bubble mode), but so far has hung back… However, that may be out of his hands by the time 2007 is over if Congress becomes deeply involved in credit tightening due to failed banks and Joe Sixpack anger over liar loans, suicide loans, rising ARMs, etc.

The stock market is a sleeping Cthulhu right now. Everyone is hoping that nothing will wake it. Many pin their hopes on high inflation, which will keep nominal values high even if true values plummet. Since there are contrary indicators out there (both inflationary and deflationary), but a strong gov’t bias towards inflation (helps the taxman and reduces the debt), betting on high inflation is probably the most rational course of action.”

By this point I was mentally exhausted.

“Ok–thanks for clarifying. I completely disagree but I was/am very curious to hear your reasoning, so I appreciate your thoughts.”

Her final response:

“They say that optimists do better in the end (in investing and in life), and your real asset is your entrepreneurial skills, not whatever stocks you own. For you, dumping money in a cheap index and forgetting about it will probably be fine because your earning power will only grow with time.

As for myself, I have lousy networking/leadership skills and I work in local gov’t which doesn’t pay so well (but the bennies are okay). I have inherited money which I need to preserve and grow to ensure I have a decent retirement (as traditional pension plans are in big trouble these days). I have a more pessimistic outlook anyway, hence
the extreme risk aversion.

Worries about the US stock market were keeping me up at night, so I had to do something. You have to do what works for you.

PS–I know I sound like a granny but I’m only 27.”

Ok…take a deep breath.

Can you imagine me saying something like that at work? “Hey guys,” I might say, “I really think the color blue makes people upgrade more often. No, seriously. You look at the sky and note the reflections of the moon off the ocean and the thousands of years of the Egyptian pyramid-makers causing sand to be blown hundreds of feet in the air, and you can understand that the long-term consequences make us cognitively wired to respond to the color blue. So I think we should make our upgrade text blue.” If I ever said that, David and Nathan, the other two PBwiki co-founders, would just put their hands in their pockets, stare at me, and blink. Then I would immediately commit seppuku in front of them.

PLEASE STOP MAKING STUPID GRAND GEOPOLITICAL ANALYSES THAT YOU THINK WILL AFFECT YOUR MONEY. PLEASE!!!

There are more important things to worry about. Are you saving enough? I’m willing to bet $100 right now that the people who make these handwavy arguments haven’t maxed out their retirement accounts, properly allocated their portfolio, and diversified. In fact, I bet these arguments are simply a misguided excuse to do nothing.

There is a simple way to point this out: ask them what they’re doing instead. This is where two things will happen: First, they will start talking about grandiose “alternative investments” like hedge funds, commercial real estate, and venture capital. Second, when you point out that most people can’t invest in hedge funds and venture capital, and that the stock market generally returns better than some of their other asset classes (“municipal bonds!!!”), they will start stuttering. Oh, there’s a third thing. You will want to kill yourself.

The people who make these kind of broad, sweeping statements (”The looming currency crisis will render retirement accounts worthless!!!”) are so far off base that I don’t even try to educate them. But they’re dangerous because they know enough buzzwords to convince novices that they might possibly be right–so, of course, they better hoard their money and do nothing because it’s too unsafe to invest!!!

If there’s one thing I really hate, it’s people taking advantage of others financially. (As a sidenote, there are over 30,000 words of Things I Hate on my other blog.) In any case, this post today is a plea to you: If you hear this kind of stupid, kooky reasoning from someone, call them out on it. If they think investing is so risky, what are they doing instead? What evidence do they have that their strategy will work? How do they explain away the last 70+ years of success in the stock market? What about the benefits of tax-free and tax-deferred growth (i.e., through Roth IRAs and 401(k)s?). How about the thousands of peer-reviewed research articles and hard data supporting sensible, long-term investing? Press them hard and watch their arguments fall apart. And remember: You can worry about the world’s political situation and the commodity price of salt in Hong Kong, or you can be constructively concerned with how to maximize your savings rate, how to live below your means, and how to invest for long-term growth to achieve your goals. Which one is more manageable?

Related:

• Oh my god! A “global correction” is underway!
• The worst financial advice from around the web

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